The formation and registration of a Limited Liability Company (Gesellschaft mit mit beschränkter haftung – GmbH), the standard business entity in Germany, is a tedious and and time-consuming endeavor compared with the formation procedures in other European countries. Estonia, for example, offers online company registration to be completed within a matter of days. Not so in Germany. However, new rules are on the horizon.

Commission proposes new EU Directive

On 25 April 2018, the European Commission presented the “Company Law Package” with the aim at digitizing company law. The measures contained in this proposal for an EU Directive are currently being discussed by the EU Council and the European Parliament.

One key element of the Company Law Package is to create the possibility of the online formation of companies in Europe across country borders and the corresponding establishment of local branches. Unlike in some European countries, in Germany and many other EU member states, the electronic formation of corporations is not yet available. The Commission wants this to change, at least for entities like the Limited Liability Company (GmbH and UG (haftungsbeschränkt)). Implementation of the Commission proposal will be optional for all other types of companies.

Online business registration in 5 days

One of the consequences of the planned online establishment of a company would be that the personal presence of the managing director at a notary would no longer be required for commercial register registrations. Instead, the necessary identification could be carried out using new online identification procedures, such as identification by new ID cards with “E-ID function” or by video conference on a smartphone and the use of blockchain technology.

According to the EU Commission, the member states should also implement new rules for the establishment and registration of companies on the national level. The aim is that online company formation should also be completed within five working days.

The Commission’s proposals for the online formation of companies, if implemented, are disruptive in nature for the traditional German company law, where the role of the notary has been pre-eminent. Issues remain, such as protection against digital abuse or the personal responsibility of managing directors and their concrete implementation by the EU and national legislators, but generally, these changes are highly welcome and, as in many other areas, it is about time that Europe strengthens its efforts to keep up with technological trends of the 21st century.

Notaries no longer involved?

However, and not surprisingly, the Commission proposal has been subject to strong criticism from certain interest groups in Germany and elsewhere. Therefore, in February 2019, the Council and Parliament agreed on an amendment to the Commission proposal and sent the amended version to the Committee of Permanent Representatives of the Member States for an opinion.

One of the changes to the original proposal, among other things, is the possibility for national legislation to implement rules that will include the involvement of notaries in the online filing process. Another one is to limit the availability of the expedited (5-day) registration only in cases where the new company is founded by natural persons (versus legal entities), and only if they use the pre-approved form articles of association envisioned by the Commission.

The Committee’s decision and the formal agreement of the Council and Parliament are still pending and it remains to be seen whether the final result will bring real improvements to the antiquated company formation system that exists in Germany and most European countries, and a step towards a more business-friendly environment that is much-needed in light of the ever-increasing competition from the United States and China.

Thinking about setting up a corporation in Germany? There are several key decisions you will want to consider, including how you want your company to be organized, what type of liability you are comfortable with, as well as how much and what kind of investments you anticipate. This article covers three of the most basic German corporate forms: the GmbH, UG (or “Mini-GmbH”), and AG, and some of the key differences that you will want to keep in mind.

Why A Corporation?

Corporations are not the only types of company you can have in Germany. There are also sole proprietorships – where one person effectively is the company, and a number of partnership models with varying complexities and benefits. Generally, these types of companies are called Personengesellschaften.

The main difference between these types of companies and the corporate forms discussed below are liability, taxes, and organization.

Liability

In corporations, there is a legal barrier between the assets of the corporation and the personal assets of the people involved with the corporation (e.g. the managers, board members, and shareholders). If the corporation owes money or gets sued for damages, other parties can go after the assets of the corporation, but are legally not allowed to go after the personal assets of the people involved with the company. This protection has limitations (to be discussed later in a post on “piercing the corporate veil”), but is generally speaking a huge advantage over non-corporate business forms.

Taxes

One should consider the different tax outcomes for the varying business forms. (More specifics of various tax requirements will be covered in a later post). Generally speaking however, while Personengesellschaften and corporations will both pay certain business taxes, corporations will also pay corporate income taxes. The overall corporate tax rate in Germany is currently around 30%, depending on local taxes and other factors. Additionally, if the corporation pays dividends on its shares, capital gains taxes will come into play.

Organization

In terms of organization, a sole proprietorship offers absolute control over the company to one person. Partnerships will share control among partners depending on how the partnership is set up, for example two general partners sharing all control and liability equally, or one partner having more control and the other having less liability.

Corporations have different organizational control depending on the form (discussed more below), but generally are managed by a group of individuals entrusted with making the company’s decisions. With corporations, there is also a system of rules for allowing shareholders to exercise some amount of control depending on a number of factors. What an entrepreneur loses in control by using a corporate form is balanced by the increased respectability of the company and attraction for investors. Shareholders are more willing to invest in a company when they know (A) that they are protected from personal liability if something goes wrong, and (B) have at least some limited say in what the company does.

What Type Of Corporation?

So you’ve decided to set up a corporation, now what type do you want? There are three main corporate forms in Germany: GmbH, UG (or “Mini-GmbH”), and AG.

Gesellschaft mit beschränkter Haftung – GmbH

The most common corporate form in Germany is the Gesellschaft mit beschränkter Haftung or “GmbH”. A GmbH protects the people involved in the company from personal liability, pays corporate income taxes, and has a straightforward organizational model.

Formation:

Setting up a GmbH is relatively simple, however it does require an up front investment of at least 25,000 Euro (which may include “in kind” assets), half of which must be put in a bank account in the name of the company.

The actual formation of a GmbH requires a notarized deed of formation and notarized articles of association. Notaries in Germany operate slightly differently than notaries in other countries, so be sure to research the process and plan the necessary time and required information.

Once the deed of formation and articles of association have been notarized, the company is registered with the Handelsregister at which point it becomes a legal entity. After that, the company must also be registered with the local trade office (Gewerbeamt or Ordnungsamt).

Management:

A GmbH is managed by the managing directors. There has to be at least one managing director who does not need to have shares in the company and does not need to be German. Shareholders of a GmbH may exercise some level of control depending on a number of factors.

Unternehmergesellschaft (haftungsbeschränkt) – UG

An Unternehmergesellschaft (haftungsbeschränkt) or “UG”, commonly referred to as a “Mini-GmbH” is the same as a GmbH with the key difference that in order to found a UG you only need one Euro of investment capital instead of 25,000 (this has led to the nickname “One Euro GmbH”). In exchange for the low initial investment amount, UGs are required to put aside 25% of their annual profits in a “corporate reserve” until the reserve reaches the level of 25,000 Euro, at which point the UG may chose to convert into a regular GmbH (there are other methods of conversion as well).

Because of the low investment capital requirement for UGs, this corporate form is ideal for entrepreneurs and startups.

Aktiengesellschaft – AG

Many of Germany’s largest and most prestigious companies are organized as Aktiengesellschaft or “AG”. These are shareholder corporations, and are especially well suited for large companies who sell their stock to the public. AGs are more difficult to set up both because the process is more complicated and work intensive, and because they are required to have a capital investment of at least 50,000 Euro. AGs are managed by a management board called the Vorstand. However, shareholders may also exercise some level of control in a number of ways, and a supervisory board called the Aufsichtsrat is meant to monitor the management board as well.

For advice or assistance with setting up a company in Germany, Budding Legal offers a full range of legal services ranging from initial consultation to final formation and everything in between. We also provide a full range of legal services for your company, from contracts and agreements to employment and immigration, we are dedicated to helping you succeed. Give us a call today.

***NOTE, this article is meant as a general informational outline and is NOT legal advice.***

Germany’s economy is booming and the country is in desperate need of skilled professionals in various industries. In order to attract highly qualified individuals, Germany introduced the Blue Card EU for Germany in 2012, (based on a European Union Directive, 2009/50 EG).

The Blue Card EU for Germany is a residence and work permit that offers certain advantages over „regular“ work and residence permits, which continue to be available. These advantages include:

Shorter processing times, since the Federal Labor Agency (Bundesagentur für Arbeit) will usually not be involved in the application process, which would otherwise be required in most cases.

„Fast track“ to permanent residency: Blue Card holders qualify for permanent residency after 33 months of having paid contributions to the German public pension system (a requirement that comes with employment) – as opposed to 60 months of contributions required for “regular” residence permit holders.

If sufficient language skills can be shown (German level “B1”), Blue Card holders may apply for permanent residency as early as after 21 months!

Family members will be able to move to Germany with the Blue Card holder immediately.

Who qualifies for a Blue Card EU for Germany?

There are a number of requirements that applicants have to meet in order to obtain a Blue Card in Germany:

A university degree, either German or foreign. If the degree was obtained abroad, there is a procedure to ascertain whether the degree will be accepted in Germany.

A concrete job offer from German employer (to be evidenced by a written employment contract)

The offered salary must be at least EUR 53,600 (gross) annually in 2019. Certain benefits, such as bonuses may be counted towards to the gross income, if they are guaranteed in the employment contract. For certain professions in which qualified individuals are in especially high demand, such as

– scientists

– physicians (excluding dentists)

– mathematicians

– engineers

– IT and communication technology specialists

the salary threshold is reduced to EUR 41,808 (2019)

How to apply for the Blue Card EU for Germany?

Generally, applicants must apply to the German diplomatic mission (Embassy or Consulate) at their place of residence, (unless they already legally reside in Germany). There are exceptions for the following nationalities:

Australia, Israel, Japan, Canada, South Korea, New Zealand, United States.

Citizens from these countries may enter the country without a visa and apply for the Blue Card from within Germany.

The following documents will have to be submitted:

Application form (there are various forms available, depending on the municipality where residence will be taken